Dominance - Magalhães e Dias

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GCR
GLOBAL COMPETITION REVIEW
Dominance
Contributing editors: Thomas Janssens and
Thomas Wessely
2014
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Global Overview
Dominance 2014
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Onno Brouwer, Thomas Janssens, Thomas
Wessely and Joanna Goyder
Freshfields Bruckhaus Deringer
Contributing editors:
Thomas Janssens and
Thomas Wessely
European Union
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Australia7
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Getting the Deal Through – Dominance 2014
Magalhães e Dias – Advocacia
BRAZIL
Brazil
Carlos Francisco de Magalhães, Gabriel Nogueira Dias, Francisco Niclós Negrão and
Thaís de Sousa Guerra
Magalhães e Dias – Advocacia
1 Legislation
5 Sector-specific control
What is the legislation applying specifically to the behaviour of
dominant firms?
The legislation applying specifically to the behaviour of dominant
firms in Brazil is mainly Law No. 12,529/11, the new antitrust law
published in Brazil on 1 December 2011, which entered into force
on 29 May 2012. Specifically, article 36, II, IV, and paragraph 2 of
Law No. 12,529/11 apply to general antitrust behaviour, including
the abuse of a dominant position (article 36, IV) and the attempt to
achieve a dominant position in the relevant market by unjustified
restrictions on competition. Law No. 12,529/11 presumes the existence of a dominant position when a company or economic group
controls at least 20 per cent of the relevant market (article 36, paragraph 2). For specific sectors of the economy, Brazil’s Administrative
Council for Economic Defence (CADE) may consider a percentage
other than 20 per cent in order to presume the existence of a dominant position (article 36, end of paragraph 2).
Is dominance regulated according to sector?
No, it is not. Infrastructure sectors of the economy are in general
subject to sector-specific rules that do not prevent the application of
the provisions of antitrust law. Although controversial in some situations (the financial sector, for instance), CADE’s case law interprets
Law No. 12,529/11 (article 31) as extending its applicability to all
regulated sectors.
6 Status of sector-specific provisions
What is the relationship between the sector-specific provisions and
the general abuse of dominance legislation?
Article 36 applies to all industry sectors. In accordance with article
31, as interpreted by CADE, antitrust law is applicable concurrently
with sector-specific rules.
7 Enforcement record
2 Non-dominant to dominant firm
How frequently is the legislation used in practice?
Does the law cover conduct through which a non-dominant company
becomes dominant?
Yes. Article 36, II, of Law No. 12,529/11 condemns the achievement of a dominant position by the control of relevant market of
goods or services. There are two important things to note: conduct
that leads to a dominant position based upon efficiencies is exempt
from prohibition (article 36, paragraph 1); and the accumulation
of market power by means of mergers and acquisitions is analysed
under another provision of Law No. 12,529/11, article 88, which is
aimed at preventing the formation of market power and has different
kinds of remedies.
3 Object of legislation
Is the object of the legislation and the underlying standard a strictly
economic one or does it protect other interests?
The object of the legislation is mainly economic. Law No. 12,529/11
is first and foremost concerned with the protection of consumers, free
enterprise and open competition.
4 Non-dominant firms
Are there any rules applying to the unilateral conduct of non-dominant
firms?
Article 36, II of Law No. 12,529/11 refers to unilateral or combined conduct of non-dominant firms that seek to control a substantial share of the market. Exclusionary and exploitative conduct
is included in these practices, as exemplified in several items in paragraph 3 of article 36.
Antitrust law is frequently and systematically applied to all industry
sectors.
Since 1994, when the former antitrust law (Law No. 8,884/94)
was published, the first practical effect was to increase awareness of
the law itself, given that Brazil had been a planned economy with
strong government intervention up to the early 1990s. At that point,
the authorities focused on developing a strong system of review of
mergers and acquisitions. This was achieved throughout the following years and, from 2003 to today, antitrust enforcement has
focused on the pursuing of cartels.
There have been several cartel convictions with increasing fines,
such as the Aggregates and Crushed Rock cartel. This was the first
case of an antitrust dawn raid in Brazil (2003). In 2005 the companies were fined in amounts ranging between 15 and 20 per cent of
their 2001 pre-tax revenues, with total fines in excess of 33 million
reais. Additionally, in the past years CADE has condemned several
cartels such as the Airlines cartel (2004), Newspapers cartel (2005),
Pharmaceuticals cartel (2005), International Vitamins cartel (2007
– the first international cartel to be sanctioned in Brazil) and the
Security Services cartel (2007). In 2010, CADE condemned the cartel of industrial gases and fined companies up to 1.7 billion reais,
one of the highest fines in the world in an antitrust case.
In 2012 CADE has conitnued to strike, condemning several cartels, such as the Hydrogen Peroxide cartel, fining companies up to
150 million reais; the Gas Station cartel; and the Bakeries and Bread
cartel, among others. The fines applied by CADE in 2012 amount
to 170 million reais.
Authorities have also been focusing greatly on enhancing investigative methods and efficiency. The former Secretariat of Economic
Law of the Ministry of Justice (SDE), at that time in charge of
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investigations, increased cooperation with the federal police in order
to jointly fight cartels, culminating in a formal cooperation agreement in December 2007. The use of dawn raids and telephone taps
has increased greatly in antitrust investigations. There were 19 dawn
raids in 2006; 84 in 2007; and 57 up to October 2008. Even though
the number of dawn raids has decreased in the past two years – two
in 2011 and four in 2012 – most investigations still awaiting a decision date back to 2007 and 2008.
Even with the recent advent of a new antitrust law, Brazilian
authorities have declared they are still focused on the fight against
cartels, especially considering that Brazil will host the World Cup in
2014 and the Olympic Games in 2016, which will demand several
infrastructure changes and investments.
8 Economics
What is the role of economics in the application of the dominance
provisions?
Antitrust law requires the application of the rule of reason to conclude
whether there was any harm to competition and, therefore, condemn
a conduct. The analysis of the specific practice based on the rule
of reason principle is carried out by weighing the anti-competitive
effects against the possible benefits or efficiencies identified, to verify
whether such benefits or efficiencies outweigh the anti-competitive
effects and, therefore, enable the practice in question to be deemed
acceptable. The quantification of such effects is mostly carried out by
economists. CADE has a Department of Economic Studies in charge
of preparing economic opinions and market studies.
CADE has recently begun a trend of considering hard-core cartels as per se offences, even though Brazilian antitrust law provides
solely for the application of the rule of reason.
9 Scope of application of dominance provisions
To whom do the dominance provisions apply? To what extent do they
apply to public entities?
According to article 31, the provisions of the antitrust law are applicable to individuals and public or private companies, as well as to
any individual or corporate association established de facto and de
jure, and even to legal state monopolies. Furthermore, in Brazil, cartels are also punishable by criminal fines and imprisonment from two
to five years and a fine (article 4, Law No. 8,137/90).
10 Definition of dominance
How is dominance defined?
Article 36, paragraph 2, defines dominance as the control of a substantial share of a relevant market. It presumes the existence of a
dominant position when a company or economic group controls 20
per cent of the relevant market. This percentage is subject to change
by CADE for specific sectors of the economy.
11 Market definition
What is the test for market definition?
The test used for market definition in Brazil – as in many other jurisdictions – is the ‘hypothetical monopolist test’, which defines the
relevant market as the smallest group of products (and the smallest
geographic area) in which a supposed monopolist can provoke a
small but significant and non-transitory increase in price. A relevant
product market includes all products or services considered interchangeable by buyers because of their characteristics, prices and use.
A relevant geographical market includes the area in which companies
supply and demand products or services on sufficiently homogeneous
competitive conditions in terms of prices, consumer preferences and
characteristics of products and services.
12 Market-share threshold
Is there a market-share threshold above which a company will be
presumed to be dominant?
Article 36, paragraph 2, presumes dominant position from the control of more than 20 per cent of market share. As mentioned above,
CADE can establish other thresholds for different sectors of the
economy.
13 Collective dominance
Is collective dominance covered by the legislation? If so, how is it
defined?
Article 36 prohibits any act that is in any way intended or otherwise
able to produce anti-competitive effects, even if it is conducted by
a collective agent that holds a dominant position (eg, an economic
group or an undertaking between competitors). In this regard, article
36, paragraph 2, which defines dominance, expressly refers to ‘a
company or group of companies’.
14 Dominant purchasers
Does the legislation also apply to dominant purchasers? If so, are
there any differences compared with the application of the law to
dominant suppliers?
The legislation also applies to dominant purchasers and there is no
difference if compared with the application of the law to dominant
suppliers. It is worth mentioning that antitrust analysis by scrutiny of
vertical restraints – namely, the creation of mechanisms that exclude
rivals, whether by increasing the entry barriers of potential competitors, increasing the costs for actual competitors, or increasing
the concerted exercising of market power – is particularly applicable
here.
Revoked Law 8,884/94 expressly mentioned that a company
holds a dominant position if at any time it controls a substantial
part of the relevant market as a purchaser, a supplier, an intermediary or a financer of a product (article 20, paragraph 2). There is no
equivalent to this express rule in law currently in force.
Abuse in general
15 Definition
How is abuse defined? Does your law follow an effects-based or a
form-based approach to identifying anti-competitive conduct?
Antitrust law does not define abuse of market power, but article 36,
paragraph 3, lists examples of practices that could be considered
as abuses of dominant positions. The case law defines ‘abuse’ as
the power to raise prices above competition levels for a significant
period of time.
16 Exploitative and exclusionary practices
Does the concept of abuse cover both exploitative and exclusionary
practices?
Article 36 covers both exploitative practices (as unfair trading conditions) and exclusionary conduct (such as predatory pricing or refusal
to deal). The basic standard for determining the abuse is the anticompetitive effect on the market. It is worth mentioning that the
practice of exclusivity is not explicitly mentioned, but it can be the
object of investigation and punishment under article 36, since its list
of anti-competitive practices is merely illustrative.
17 Link between dominance and abuse
What link must be shown between dominance and abuse?
The basic standard for determining the abuse is the anti-competitive
effect on the market. It may be presumed that abuse will not produce
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BRAZIL
anti-competitive effects if there is no dominant position. Nevertheless, article 36 also prohibits practices used by non-dominant firms
that could harm competition, even in the absence of actual injuries
such as unfair competition.
Abuse of a dominant position could also occur if the practice is
aimed at monopolising a neighbouring market, such as tying.
18 Defences
What defences may be raised to allegations of abuse of dominance?
Is it possible to invoke efficiency gains?
Legislation does not provide exemptions to abuse of dominance. The
only exemption specifically provided is applicable to monopolisation
(achieving a dominant position), which applies when the achievement of market control is as a result of competitive efficiency.
Case law does provide a defence to abuse of dominance
where there is a legitimate business justification for the conduct.
In addition, the antitrust offence will only take place if the rule of
reason test indicates that the harmful effects to competition prevail
against any hypothetical beneficial effects.
Specific forms of abuse
• the competitor is unable, reasonably or in practice, to duplicate
the essential facility; and
• providing access to the facility is unfeasible.
25 Exclusive dealing, non-compete provisions and single branding
Exclusive dealing, non-compete provisions and similar contractual
obligations can constitute violation of article 36 if they force competition by excluding or preventing competitors from access to the
market, to foreclose. There is no threshold established by legislation
above which the foreclosure is considered to be illegal. However,
CADE case law considers the 20 per cent threshold for dominant
position to be a general guideline.
Additionally, CADE case law – especially in the review of mergers and acquisitions – usually considers a five-year maximum for
non-compete provisions.
26 Tying and leveraging
Tying and leveraging practices are unlawful because they result in
market power weighting of different products, abusively increasing
profits to the detriment of buyers and consumers, while ‘blocking’
the downstream segment (generally, of distribution) for actual and
potential competitors (increase in barriers to entry).
19 Price and non-price discrimination
Discrimination is explicitly mentioned by article 36, paragraph 3, X,
Law 12,529/11. CADE Resolution No. 20/1999 expressly mentions
that discrimination may or may not be unlawful, and that this conduct requires a specific analysis of its effects on each concrete case.
In practice, discrimination will most likely be considered unlawful
when it conceals other forms of abuse, such as refusals to deal, tying
or predatory pricing. Vertically related practices become unlawful
when discrimination is used to raise rivals’ costs and, thus, restrict
the market.
20 Exploitative prices or terms of supply
Exploitative prices and terms and conditions of supply are explicitly
mentioned by article 36, II, and article 36, paragraph 3, IX, as forms
of abuse of dominant position.
21 Rebate schemes
Rebate schemes could raise antitrust concerns if associated with
predatory pricing or exclusionary practices.
22 Predatory pricing
Predatory pricing is explicitly prohibited by article 36, paragraph 3,
XV. This involves a deliberate practice of pricing below the average
variable cost, seeking to eliminate competitors, and being able to
charge prices and yield profits that are closer to monopolistic levels
(ie, capable of offsetting the losses resulting from selling below cost)
after the exclusion of competitors.
27 Limiting production, markets or technical development
These practices can constitute a form of abuse of dominant position
under article 36.
28 Abuse of intellectual property rights
Abuse of intellectual property rights is subject to specific legislation
(Law No. 9,279/96) that prohibits abusive conduct and submits the
intellectual rights to compulsory licence. The intersection between
antitrust law and intellectual property rights law has, however,
recently resulted in several cases in Brazil.
The general position of Brazilian antitrust authorities is that IP
protection does not necessarily lead to dominance and, even if it
does, this does not necessarily or automatically result in an antitrust
infringement. The former SDE already understood that constant
requests for IP extension in order to delay the entrance of competitors in the market may constitute sham litigation.
The intersection between IP and antitrust has resulted in some
interesting cases. In the past, regarding the auto parts market, the
former SDE has ruled that actions taken by companies to protect
auto parts design was simply the regular exercise of their rights,
and dismissed an investigation. A similar situation occurred in the
aluminium sections market. On the other hand, in the Auto Parts
case, CADE did not agree with the former SDE’s conclusions and
determined that the SDE should continue the investigation under an
administrative procedure that is currently continuing. The investigation is presently being carried out by the General Superintendence of
CADE, the agency that has incorporated the functions of the former
SDE since the new antitrust law entered into force.
23 Price squeezes
Price squeezes are analysed as a joint conduct of exploitative prices
and predatory pricing. In vertically related industries, price squeezes
can also cause possible foreclosure effects.
24 Refusals to deal and access to essential facilities
Refusals to deal and access to essential facilities under particular
circumstances may constitute an abuse under article 36. CADE’s case
law defined abuse to be present when:
• the refusal of access is likely to eliminate all competition in the
market;
• the access is indispensable for entering the market;
• the denial has no objective or reasonable justification;
29 Abuse of government process
As discussed in question 5, Law No. 12,529/11 is applicable to all
regulated sectors; there is no antitrust immunity. This is particularly
relevant to cases of sham litigation, in which the requests to government bodies or the use of the judiciary are blatantly groundless
and are actually aimed at interfering directly with the commercial
relations of a competitor, resulting in damage to the market. The
Brazilian antitrust authorities have had between two and four sham
litigation cases per year since 2005. In the tachograph market, CADE
has condemned a company for sham litigation owing to an invitation
to create a cartel in order to avoid the entrance of a competitor in
the market and fined the company 1 per cent of its annual pre-tax
revenue, totalling 10 million reais.
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Update and trends
As mentioned in this chapter, Brazil has a new antitrust law that
has been in force since 29 May 2012. This law has brought
significant changes regarding the structure of the bodies in charge
of antitrust defence in Brazil and authorities are still adapting
to the new environment and framework. Despite not being the
focus of this chapter, it is worth mentioning that the timeline of
merger filings have changed drastically since Brazil, due to the
new law, moved to a pre-merger review system. The thresholds of
filings have also changed and Brazilian authorities are expecting
a significant reduction in the volume of filings. There are no shifts
of emphasis in the enforcement practice so far. Even with the new
antitrust framework, we understand that CADE will continue to
focus on anti-competitive practices (especially cartels).
Regarding regulatory agencies, if for example, an agency sets a
price standard, CADE might review the standard if it harms competition. Companies that followed the standard would not be punished
in this situation in order to preserve the principle of legal certainty.
30 ‘Structural abuses’ – mergers and acquisitions as exclusionary
practices
Mergers and acquisitions are addressed in article 88 of Law No.
12,529/11, which submits any acts that may limit or otherwise hinder open competition or result in the control of relevant markets to
CADE’s approval.
31 Other types of abuse
Other types of abuse may fall under article 36 if they produce the
anti-competitive effects that the law seeks to prevent.
Enforcement proceedings
32 Prohibition of abusive practices
Is there a directly applicable prohibition of abusive practices or does
the law only empower the regulatory authorities to take remedial
actions against companies abusing their dominant position?
Article 36 is directly applicable, since it constitutes public law and
refers to constitutional individual rights. Article 36 can be invoked
in court regardless of the submission to the regulatory authorities.
33 Enforcement authorities
Which authorities are responsible for enforcement and what powers of
investigation do they have?
Before Law No. 12,529/11, three government agencies were involved
in antitrust analysis in Brazil: the Secretariat for Economic Monitoring of the Ministry of Finance (SEAE), the former SDE and CADE.
The SDE was the chief investigative body in matters related to anticompetitive practices. The SEAE had more general powers with
respect to monitoring prices in the various sectors of the economy.
CADE was the administrative tribunal, composed of seven commissioners, including a chairman, which made the final judgment on
both merger reviews and anti-competitive practices.
Once Law No. 12,529/11 entered into force, the structure of
the authorities responsible for enforcement was modified. The
Economic Department of SDE was incorporated by CADE and no
longer exists as an independent body. CADE now has a General
Superintendence (equivalent to the SDE in the previous structure),
an Administrative Tribunal (equivalent to the Council’s structure
today), and a Department of Economic Studies. The SEAE has a role
of promoting antitrust awareness among both Brazilian authorities
and wider society, but does not have any investigative powers since
the new law entered into force.
Regarding the powers of investigation, the General
Superintendence has the power to undertake on-site inspections,
search and seizure warrants and wire-tapping (with a judicial order
requested by the Office of the Attorney General).
34 Sanctions and remedies
What sanctions and remedies may they impose?
Article 37 allows CADE to impose fines that vary from 0.1 per cent
to 20 per cent of the firm’s annual turnover in its branch of business
activity in the previous year of the anti-competitive practice. It is
relevant to note that the taxes are not excluded from the basis for
calculating the fines.
Article 85 permits CADE to enter into an agreement with the
defendant, at any phase of the proceeding, whereby the defendant
undertakes to cease the conduct under investigation (the ceaseand-desist commitment). If this occurs during an investigation into
dominance, the agreement will not be taken to condone the practice
under investigation. The case is put on hold while the commitment
is duly complied with. If the conditions set out in the commitment
are fully met, the case is dismissed.
Since May 2007, because of a new rule, Brazilian antitrust
authorities were able to accept entering into cease-and-desist commitments even with companies accused of cartels, but in that case
parties must pay a sum of money and admit to the practice under
investigation, in order to obtain the commitment. The money is
designated to a fund created to protect matters of general public
interest.
According to article 84, CADE and the General Superintendency
can also adopt preventive measures (cease-and-desist orders) ‘whenever there are signs or sound reasons to believe that the defendant
directly or indirectly caused or may cause irreparable or substantial
damage to the market, or that it may render the final outcome of the
proceedings ineffective’.
The first punishment due to abuse of dominance by CADE was
in the Flat Steel market cartel (1999), fining companies over 50 million reais. After that, many other condemnations in other relevant
markets were followed, such as the Aggregates and Crushed Stone
cartel (2005), in which companies were fined 15 to 20 per cent of
the annual pre-tax revenue of each firm participating in the cartel, resulting in a total amount of over 33 million reais. Sanctions
were also imposed on the Square Iron Bar cartel (2005), in which
CADE imposed fines of 7 per cent of the annual pre-tax revenue of
the participating firms, totalling 345 million reais in fines. One of
the participating firms was fined 245 million reais. More recently,
CADE imposed fines of 15 to 20 per cent of the annual pre-tax
revenue of each firm participating in the cartel of aggregates (the
Cement Industry case (2005)), and fines of 10 to 20 per cent of
the pre-tax revenues of each participating firm in the Vitamin cartel
(2007), totalling 17.7 million reais. In 2010, CADE condemned the
Industrial Gases cartel and imposed fines of between 10 per cent
and 50 per cent (in this case, to a recidivist company). In this case,
one of the companies was fined in 1.7 billion reais, one of the highest fines in the world in an antitrust case. At the time of writing, no
company has yet been fined for cartel activity under the rules of the
new antitrust law.
35 Impact on contracts
What are the consequences of an infringement for the validity of
contracts entered into by dominant companies?
A contract that violates antitrust provisions is unenforceable.
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36 Private enforcement
38 Recent enforcement action
To what extent is private enforcement possible? Does the legislation
provide a basis for a court or authority to order a dominant firm
to grant access (to infrastructure or technology), supply goods or
services or conclude a contract?
Article 36 can be enforced by clients, consumers, or competitors in
private suits before judicial courts. They can also provoke prosecution by the antitrust agencies.
37 Availability of damages
Do companies harmed by abusive practices have a claim for
damages?
Article 47 of the antitrust law permits injured parties to defend their
individual or general public interests in court by way of antitrust
measures and the awarding of losses and damages suffered in connection therewith. This is irrespective of the corresponding administrative proceedings, which shall not be stayed in view of the court
action.
What is the most recent high-profile dominance case?
The aggregate cartel in the Cement Industry case, which was decided
by CADE in late 2005 with fines of between 15 and 20 per cent of
pre-tax revenues, is a high-profile dominance case. It was the first
case in which the authorities used dawn raids. The Vitamin cartel,
decided in 2007 with fines of between 10 and 20 per cent of pre-tax
revenues, is also relevant because it was the first Brazilian case on
international cartels. Additionally, in 2009, a major brewery was
fined 2 per cent of its pre-tax revenue for abuse of a dominant position due to the use of a customer loyalty programme similar to airline
frequent flyer and other mileage programmes. In 2010, CADE fined
the Industrial Gases cartel up to 25 per cent of pre-tax revenues.
Most recently, on January, 2013, a producer of vehicle equipment
was fined 1 per cent of its pre-tax revenue for abuse of a dominant
position due to resale price maintenance.
Carlos Francisco de Magalhães
Gabriel Nogueira Dias
Francisco Niclós Negrão
Thaís de Sousa Guerra
[email protected]
[email protected]
[email protected]
[email protected]
Rua Armando Penteado, 304
Pacaembu
01242-010 São Paulo
Brazil
Tel: +55 11 3829 4411
Fax: +55 11 3825 8695
www.magalhaesdias.com.br
www.gettingthedealthrough.com
33
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